Freeport-McMoRan: The Set-Up for the Next Buying Opportunity

Take a look at the one-year chart of this great company (Freeport-McMoRan (NYSE:FCX)), and pay special attention to the 200-day simple moving average:

Click to enlarge

This Yahoo Finance chart reveals how this stock has been traded going all the way back to the July 2010 lows. The 200-day has acted like a powerful support line, and in recent months when it has been breached it has set the stage for a buying opportunity.

I'm aware that copper futures fell to a five month low in May, bouncing about three weeks ago and heading into a key test at resistance between $4.25 and $4.30. Sure enough copper has corrected down to $4.10, but my research points to the fact that China is desperately low on copper supply and is a massive buyer. If support around $4 holds, copper could stage a huge rally this summer and fall.

Many realize that FCX is the go-to equity play for copper, bottoming out about one week after its underlying commodity.The recent intra-day low on FCX was on May 17, 2011, when it briefly touched $46.06. If that level holds in this correction perhaps we will see another impressive rally.

From May 17th to the May 31st high of $52.70 FCX rallied an impressive 14.4%, and it wouldn't surprise me to see that set-up happen all over again.

We need to remember that this stock is selling at less than 10 times current earnings, and less than 8 times forward earnings. Insiders like their own company, and CEO Richard Adkerson owned over 2,447,000 shares as recently as Feb.15, 2011. He and a few others sold token amounts when the stock reached above $56 a share, yet in the past two months they've been mostly buyers again.

FCX's year-over-year quarterly earnings growth was a stunning 59%. It is sitting on total cash (most-recent-quarter) of over $4 billion and has operating cash flow (trailing-twelve-months) of nearly $7 billion. That's on top of the nearly $3.6 billion (ttm) of levered free cash flow.

We haven't even considered that this company also has "recoverable proven and probable reserves" of gold, silver, molybdenum and cobalt. In a world where gold is more than $1,540 and silver is $37.57, combined with their impressive copper reserves, they are one, big cash cow.

When you compare them to Southern Copper (NYSE:SCCO) or Vale S.A.(NYSE:VALE) I think you'll agree that they are in a "league of their own." I'm not saying they have it ideal, especially with the on again off again problems at their Grasberg minerals district in Indonesia, not to mention the potential vulnerabilities at the Tenke Fungurume minerals district in the Democratic Republic of Congo.

What I am saying is that they've emerged as the virtual "proxy" for owning copper, except with Freeport you get some very nice leverage, especially when you buy low. So at the very least add it to your watch list and learn all you can about it.

By the way, also keep an eye on Sterlite Industries (SLT), India's largest non-ferrous metals and mining company. Results for the March quarter were impressive with net revenue up 39% from the year-ago quarter and net profits rising 39% year-over-year.

EBITDA increased 40% year-over-year and 55% sequentially. EBITDA contribution from Sterlite's copper segment was the highest sequentially, followed by its aluminum and zinc businesses.

Strong volumes in its zinc, silver and power businesses could drive earnings in 2012 and 2013. The company's international zinc business could boost profitability in 2012 and 2013.

SLT is a $50 billion plus Asian powerhouse that is selling at only 8 times forward earnings. As its zinc volumes expand so will its silver, and considering the logistics of the company it will benefit massively by the industrial expansions going on in India as well as China.

Disclosure: I am long FCX, VALE.

Additional disclosure: I have good-till-cancelled orders to buy more fcx near $46 and also to buy some SLT at $14.35.